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© 2016 Grant Thornton India LLP. All rights reserved.
Union Budget 2016-17Impact on the healthcare sector
Contents
01 Foreword
02 An overview
03 Key challenges
04 Growth drivers
05 Key policy initiatives
06 Direct tax proposals
07 Indirect tax proposals
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Foreword
Promising to increase the overall healthcare spend, the
Finance Minister had little to offer in terms of tangible
industry level benefits. Focusing largely on addressing
the needs of those falling in the low income groups and
the unorganised sector, the Union Budget saw
announcements aimed at the masses. These
announcements are either meant for an increased
insurance penetration for families living below the
poverty line or provisions availability generic medicines
at affordable prices. Oddly enough, leaving aside all
other life threatening diseases, dialysis has found a
special favour in this budget. This aims to address a
larger population which is in need for regular dialysis
treatment. While the government has already addressed
the need to strengthen the delivery system in the
country, the healthcare industry will remain hopeful of
more radical changes in the years to come.
Vrinda MathurPartner, Grant Thornton India LLP
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
An overview
The healthcare sector provides an extensive
coverage across various segments including the
pharma, public and private sector healthcare delivery
models and institutions, medical equipment sector,
public and private training colleges and medical
institutions as well as medical devices industry
besides various models spread over pathology and
diagnostics.
The overall Indian healthcare market is estimated at
around US$ 100 bn with hospitals and healthcare
delivery contributing 65% followed by pharma and
medical devices with 20% and 8%, respectively.
Healthcare delivery, medical insurance and medical
devices (including medical equipment) are sectors
which contribute significantly to the growth of this
industry. From an incentivisation perspective,
exempting healthcare services from tax was a
welcome means aimed to reduce the costs of
healthcare, however, that alone cannot contain all
the costs.
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Key challenges
Attracts less than 2% allocation
from the GDP spend
Demand supply gap – beds,
doctors and locations
Access to affordable
healthcare for all
High levels of import in
medical devices,
equipment and
consumables
Inability to monetise fully
from medical value tourism
Low insurance penetration
Ambiguity around price control and frequent
modifications under the NPPS regime
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Growth drivers
Addition in the number
of beds (bed capacity)
Expansion of affordable
healthcare services
Focused penetration in
Tier II and Tier III cities
Reduce duties on imports
Inclusion of private
sector to improve quality
of healthcare
Local manufacturing of
devices to improve profitability
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Key policy initiativesFlavour of the National Health Policy
• Universal health coverage and increased allocation
of health insurance premium (including specifically
for senior citizens) will pave the way for wider
healthcare access.
• Creation of new National Health Mission (NHM) for
providing effective healthcare across urban and
rural population.
Encouraging the PPP model
• Increase in the number of projects being developed
using the PPP model.
Government recognition of Medical Value Tourism
• Medical value tourism through the launch of a
formal government website provides an overseas
patient details of accreditations, therapies and
hospitals which provide relevant treatment.
Rectifying the Drug Pricing Policy
An irrational drug pricing policy is still under review.
Clarity of basis, coverage of medicines and therapies
and economic sense to service the domestic market
will be clear drivers for provision of medicines.
Incentives for deeper penetration of healthcare
Government's incentives for increasing beds and
providing tax incentives in Tier II cities are already in
force.
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Other Key policy initiativesProposed changes in Foreign Direct Investment
('FDI')
• The basket of eligible FDI instruments is proposed
to be expanded to include hybrid instruments
subject to certain conditions.(The present basket
includes equity shares, fully and mandatorily
convertible debentures, fully and mandatorily
convertible preference shares and warrants)
• Foreign investors will be accorded residential status
subject to certain conditions (currently foreign
investors are granted business visa only up to 5
years at a time)
Other key announcements
• Equipments for dialysis to be exempted from basic
customs duty, excise/ CVD and SAD
• National Dialysis Service Programme with funds
through PPP mode to provide dialysis services at
all district hospitals
• For economically weaker sections (EWS) launch
of new health protection scheme
© 2016 Grant Thornton India LLP. All rights reserved.
Direct tax proposals
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Income Tax Rates for Corporates
• Tax rate reduced by 1% to 29% for domestic
companies with a total turnover/gross receipts
of upto Rs 5 crore in FY 2014-15
• Option for newly set up domestic companies
engaged solely in manufacture or production
to be taxed at 25% resulting in a 5% reduction
in rate - the company should not avail of
specified tax incentives
• No other changes in corporate tax rates or
surcharge
Reduction in corporate tax rates for new
manufacturing companies and existing
small companies.
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Phasing out of incentivesProposed phase out of incentives (profit linked/investment linked/weighted deduction):
Section Particulars Current incentive Proposed phase out of incentives
32 Accelerated depreciation provided to certain
industrial sectors to give impetus for investment
Depreciation up
to 100% available
Depreciation now capped at 40% for
all assets from FY 2017-2018
35(1)(ii)
Expenditure on scientific research: for sum paid to
approved scientific research association and other
approved institution undertaking scientific research
Weighted
deduction of
175%
Deduction capped at:
• 150% from FY 2017-18 to 2019-20
• 100% from FY 2020-21
35(1)(iia)
Expenditure on scientific research: for sum paid as
contribution to an approved scientific research
company
Weighted
deduction of
125%
Deduction capped at 100% from FY
2017-18
35(1)(iii)
Expenditure on scientific research: for contribution
to an approved research association or university
or college or other institution to be used for
research in social science or statistical research
Weighted
deduction of
125%
Deduction capped at 100% from FY
2017-18
35(2AA)
Expenditure on scientific research: for any sum
paid to a National Laboratory or a university or an
Indian Institute of Technology or a specified person
for the purpose of approved scientific research
programme
Weighted
deduction of
200%
Deduction capped at:
• 150% from FY 2017-18 to 2019-20
• 100% from FY 2020-21
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Phasing out of incentives
Section Particulars Current incentiveProposed phase out of
incentives
35(2AB)
Expenditure on scientific research: incurred
by a company, engaged in the business of
bio-technology or in the business of
manufacture or production of any article or
thing, on scientific research on approved in-
house research and development facility.
Weighted deduction of 200% of the
expenditure (not being expenditure
in the nature of cost of any land or
building)
• 150% from FY 2017-18
to 2019-20
• 100% from FY 2020-21
onwards
35AC
Deduction for payments to public sector
undertakings or local authority and other
eligible organisation for specified scheme
for promotion socio-economic welfare
100% deduction Nil from FY 2017-2018
35AD
Investment linked deduction for the
purchase of machinery and other capital
assets (100% or 150% in various cases) for
specified businesses, eg, cold chain facility,
warehousing facility for storage of
agricultural produce, an affordable housing
project, production of fertiliser, hospitals
Weighted deduction of 150% of
capital expenditure (other than
expenditure on land, goodwill and
financial assets)
100% of capital
expenditure from FY 2017-
18
35CCD
Expenditure incurred (not being
expenditure in the nature of cost of any
land or building) on any notified skill
development project by a company
Weighted deduction of 150% 100% from FY 2020-21
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Welcome Incentives
Incentive for start-ups
• Start ups to be allowed a 100% deduction of profits for three consecutive years out of five years subject
to fulfilment of prescribed conditions
Introduction of Patent box regime
• Royalty income earned in respect of patent developed and registered in India by a resident of India
proposed to be taxed at a concessional gross rate of 10%
• MAT not applicable to income from patents developed and registered in India subject to prescribed
conditions
Clarification with respect to concessional rate on gains from sale unlisted securities
It has been specifically provided that the long term capital gains, arising to non-residents from the transfer
of capital asset being unlisted securities or shares of a company not being a company in which public are
substantially interested, shall be taxable @10%.
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Reorganisation / restructuring
Proposal seeks to bring clarity on the buy back tax regime with a
view to curbing practice of undertaking buy back through court
process merely to mitigate the existing buy-back tax.
Buy-back tax
• The scope of levy of buy-back tax has been widened to cover any buy-back irrespective of applicable
provisions of the Companies Act.
• Buy-back tax shall continue to be levied at 20% on distributed income
• Amendment proposed to be effective 1 June 2016
Additional condition for tax neutral conversion of a company into Limited Liability
Partnership (LLP)
An additional condition has been inserted for a tax neutral conversion of a company into a LLP viz. the
value of the total assets in books of accounts of the company in any of the 3 preceding FYs does not
exceed Rs 5 crore
Insertion of this additional condition has further
restricted the flexibility available to small
companies for tax neutral conversion into LLPs.
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Other proposals• Simplification, rationalisation and digitilisation of tax procedures
• Country-by-Country reporting introduced for multinational enterprises along with stringent non-
compliance penalty
• Deferral of Place of Effective Management (PoEM) Rules by one year
• Holding period for unlisted shares proposed to be reduced from 3 to 2 years – this proposal is not
covered in the bill as it was laid down before the Parliament
• PAN furnishing requirement for non-residents: It is proposed to accept alternate documents in the
absence of PAN to obviate withholding tax at the higher rate
• It is proposed to limit the disallowance of expenditure for earning exempt income to1% of the average
monthly value of investments
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Indirect tax proposals
Goods and Service tax
• No specific announcement on Goods & Service Tax (GST)
Central Excise
• No change in standard rate of Excise duty
• Exemption from Excise duty to certain parts of dialysis equipment namely Disposable sterilized dialyzer
and micro barrier of artificial kidney
Service Tax
• Krishi Kalyan Cess (KKC) at 0.5% of value introduced on all taxable services; effective service tax thus
proposed to increase to 15% (inclusive of SBC and KKC) (from 1st June 2016)
• General insurance services provided under Niramaya Health Insurance Scheme (from enactment of
Finance Bill, 2016)
• Service provided to Government by way of construction, erection, etc. of clinical establishment
(exemption restored from 01.04.2015)
Union Budget 2016-17 | Impact on the healthcare sector
© 2016 Grant Thornton India LLP. All rights reserved.
Indirect tax proposals
Customs
• No change in standard rate of Basic customs duty (BCD).
• Exemption from BCD/CVD/SAD to certain parts of dialysis equipment.
• Exemption from BCD to continue for certain specified assistive devices/ aids for the differently abled.
• Reduction of BCD on certain specified inputs such as ethyl alcohol, sterilized dialyzer and micro barrier of
artificial kidney
Customs tariff concessions
• BCD exemption on Medical Use Fission Molybdenum-99 imported by Board of Radiation and Isotope
Technology (BRIT) for manufacture of radio pharmaceuticals reduced (from 7.50% to NIL)
• BCD on Denatured ethyl alcohol rationalized from 5% to 2.5%
• BCD and SAD exemption on Disposable sterilized dialyzer and micro barrier of artificial kidney
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